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The Oil and Gas Market In Brazil

Brazil, located on the east coast of South America, is a federal republic characterized by its large and growing domestic market, diversified economy and political stability. Brazil is one of the world’s paramount hydrocarbon countries with world-class exploration success and a regulatory framework that allows for private investment. In 2011, Brazil was a net importer of oil as a result of increased energy consumption in recent years. As a result, increasing domestic oil production has been a long-term goal of the Brazilian government. 

Geographic, Economic and Political Factors

Exploration in Brazil began in the 1930s and the first commercial discovery was made in 1939 in Bahia. However, production output did not experience substantial growth until the late 1970s when the state oil company, Petróleo Brasileiro SA (“Petrobras”) extended its operations offshore. In the Campos Basin, offshore Brazil, a series of giant deep-water discoveries were made in the 1980s and 1990s. The discovery of the “pre-salt” reserves (encompassing a group of reservoirs older than the salt layer) in the Santos Basin followed those in the Campos Basin, and has subsequently been the focal point of current development in Brazil. The pre-salt discovery is credited with being the potential catalyst for making Brazil an increasingly important oil exporter. However, there are also other opportunities that extend beyond the shallow and deep waters’ conventional potential, including the mature coastal basins that have yet to experience enhanced oil recovery, the onshore basins that have barely been explored and the country’s unconventional potential which is just beginning to be assessed.

The Recôncavo Basin is a 10,200 km2, onshore, resource-rich basin located on Brazil’s east coast with a proven hydrocarbon fairway adjacent to Petrobras’ Miranga oil field discovery. Brazil’s first oil production came from this basin in 1939. Since then, over 6,000 wells have been drilled in the basin, with cumulative production exceeding 1.5 billion barrels of light oil from 86 fields. Current production is over 60,000 barrels of oil equivalent per day, and the majority of the basin’s production comes from the Sergi, Agua Grande, and Candeias reservoirs found at depths of 315 metres to 3,200 metres in this area. The basin has a well-developed infrastructure network and an active service industry.

Principal Applicable Legislation

In Brazil, Law No. 2004 enacted in 1953 created the state monopoly of the petroleum industry and Petrobras, a state-owned legal entity, which was the sole company conducting exploration and production activities in Brazil until 1995.

Amendment No. 9 to the Brazilian Constitution, enacted on November 9, 1995, authorized the Brazilian government to contract with state and private companies, with head offices and management located in Brazil, for the exploration and production of oil and natural gas, as well as to grant authorizations for the refining, transportation, import and export of oil, natural gas and its by-products, discontinuing Petrobras’ exclusive right to explore and produce petroleum and natural gas in Brazil.

The regulatory model is governed by Law No. 9478 of August 6, 1997 (the “Petroleum Law”), as amended, which controls the granting of concessions for carrying out exploration and production activities to Brazilian companies. The Petroleum Law, as amended, also established a legal framework for pre-salt layer areas and strategic areas to be defined by the Brazilian government and which will be subject to the production sharing regime. In accordance with the Petroleum Law, the acquisition of oil and natural gas property and oil and gas operations by state and private companies is subject to legal, technical and economic standards and regulations issued by the ANP, the agency created by the Petroleum Law and vested with regulatory and inspection authority to ensure adequate operational procedures with respect to industry activities and the supply of fuels throughout the national territory.

The ANP has authority for the implementation of the national oil and natural gas policy in accordance with the National Council of Energy Policy. The ANP conducts bid rounds to award exploration, development and production contracts, as well as to approve the construction and operation of refineries and gas processing units, transportation facilities (including port terminals), import and export of oil and natural gas, as well as supervision of the activities which integrate the petroleum industry and the general enforcement of the Petroleum Law.

During a public bid procedure, any company evidencing technical, financial and legal standards under the applicable regulations may qualify and apply for particular blocks made available for concession contracts. Qualified companies may compete alone or in association with other companies, including through the formation of “consortia” (unincorporated joint ventures), provided they agree to comply with all the applicable requirements of Brazilian corporate law. Blocks awarded and the duration of the exploration and production periods are defined in the contracts which, besides the usual covenants that can be found in oil concessions, such as exploration and development programs, relinquishment of areas, and unitization, include reversion to the state of certain assets at the end of the concession. Contracts may be assigned or transferred to other Brazilian companies that comply with the technical, financial and legal requirements established by the ANP.

Oil and natural gas resources in Brazil, whether onshore or offshore, belong to the Brazilian government. However, under the concession regime, after the discovery of oil and gas reserves, ownership is assigned to the concessionaire. Under the principles of Brazil’s federal constitution, the national territory comprises all land and the continental shelf. Brazil is a signatory of the conventions regulating the economic use of the sea and its subsoil. Brazil is thus entitled to the enjoyment of the resources over the territorial sea and marine platform up to the limits indicated in the pertinent treaties.

The Regulatory Regime in Brazil

Until 1995, Brazilian oil and gas activities were monopolized by state-owned Petrobras. Constitutional Amendment No. 09 (1995) loosened this monopoly by allowing that the Brazilian government could contract with state-owned and private companies to conduct many oil and gas activities. Today, state-owned or private company participation in these oil activities is regulated in large part by the Petroleum Law. Under the “concession” regime regulated by the Petroleum Law, the ANP has conducted twelve bidding rounds to grant concession contracts for onshore and offshore petroleum exploration and production blocks to concessionaries, and to grant “Mature Field” contracts. In addition to the existing concession regime, newer Brazilian laws have confirmed a “production sharing contract” regime to be applied for future licensing of the defined pre-salt area and certain other areas to be deemed strategic by the government.
The primary regulatory agencies charged with regulating oil and gas activities in Brazil are:

  • the Brazilian National Council of Energy Policy, having the main purposes of fostering rational use of Brazil’s energy resources, ensuring proper functioning of the national fuels inventories system, reviewing energy matrixes for different regions of Brazil, and establishing guidelines; and

  • the ANP, being the national regulator of the oil, gas and biofuels industries, is generally charged with regulating, contracting and supervising activities related to oil and natural gas, and establishing technical standards for various related activities.
    In addition to this regulatory framework, environmental regulations are applicable and some licences are required for the performance of oil and gas activities. Government environmental agencies are responsible for issuing such licences and federal or state rules may apply depending on the activity to be carried out.

As mentioned above, there are two different regulatory frameworks for the granting of exploration and production rights in Brazil: the concession regime and the production sharing contract regime. All exploration and production rights anticipated to be held by the Company pursuant to the Brazil Acquisition fall under the concession regime.

Under the concession regime, the concession of oil and gas blocks in Brazil is awarded by means of bidding rounds carried out by the ANP. The ANP has the authority to define which oil and gas blocks shall be tendered and to release general terms and conditions comprised in the tender documents. Such tender documents establish all technical, financial and legal documents and requirements that the would-be concessionaire must present or satisfy in order to be qualified to participate in the bidding round under various categories of participation. The ANP’s bid evaluation criteria are signature bonus, minimum exploration program, and local content. Federal, state and local governments are recompensed through “government takes”, which are defined as all payments to be made by a concessionaire as a result of the activities of exploration and production of oil and natural gas. Government takes are comprised of:

  • Signature Bonus: a lump-sum payable in a single instalment upon execution of the concession agreement;

  • Royalties: financial compensation to be paid monthly by the concessionaries;

  • Special Participation: extraordinary financial compensation payable in the event that high volumes of oil or natural gas are produced or a certain field otherwise enjoys high profitability; and 

  • Payment for area occupation or retention: consists of a yearly sum to be paid for the occupation or retention of oil prospecting areas. ANP sets the amounts to be paid in the bidding documents and concession agreements, but there are minimum and maximum standards established by law.

There is no restriction on direct or indirect foreign participation in exploration and production rights, provided that the foreign investor incorporates a company under the Brazilian law with head office and management in Brazil and complies with all technical, legal and financial requirements established by the ANP. No preference rule is established.

Operations are generally divided into two phases: exploration and production. In the case of a declaration of a commercial discovery in the exploration phase, the company or consortium automatically enters into the production phase, which also encompasses the development stage. In general terms, the same company or consortium that performs the exploration activities is entitled to produce the hydrocarbons.

Brazil’s Royalty System

Royalties are chargeable on oil and gas production. The basic royalty payable under the Petroleum Law is ten percent. This rate can be varied to a lower rate at the discretion of the ANP, but cannot be reduced below five percent. Reduced rates have occasionally been set during the initial licensing process. Block REC-T-170 is subject to a 10 percent royalty.

In addition, landowners are entitled to a percentage of the production from their lands, which may vary from one-half of one percent to one percent, to be defined by the ANP according to the Petroleum Law. Block REC-T-170 is subject to a 1 percent land royalty.

In addition, Block REC-T-170 is subject to an occupation or retention of area fee corresponding to: (i) in the exploration phase, the amount of 121.75 Brazilian real ($54.81) per square kilometer or fraction of the concession area, with the anticipated increase in Decree no. 2,705, of August 3, 1998 in the case of extension; (ii) in the period of the development phase of the production phase, the amount of 243.50 Brazilian real ($109.61) and (iii) in the production phase, at the amount of 1,217.50 Brazilian real ($548.05).

Taxes in Brazil

The statutory tax rate applicable to corporate income is 34 percent. This is comprised of a basic 15 percent corporate income tax, plus 10 percent surtax and nine percent Social Contribution on Net Profit Tax. Corporate income tax is payable on the total upstream profits of a company.

There are also a number of other taxes and social contributions that are levied by federal, state and municipal authorities in Brazil on tangible and intangible investments made in connection with oil and gas projects. The two main forms of such levies are value-added (sales) taxes and import duties. The actual application of these levies is project and location specific.